The Effects of Stock Option-Based Compensation on Share Price Performance

Sammanfattning: This thesis investigates the relationship between stock option-based compensation and share price performance. As opposed to previous studies, we view executives as a heterogeneous group and employ executives' age as a proxy for differences between individuals to explain the changing effects of stock option compensation on share price performance. Firstly, we find that the overall effect of stock option compensation has a negative contribution to share price performance, indicating that the compensation has not been optimally structured from a shareholder perspective. Secondly, we find that executive age affects the compensation-performance relationship negatively, but that this effect is attributable to a lower fraction of stock option compensation of total compensation which we find arise with executives' age. Our findings suggest that stock option compensation plans would generate higher stock returns if the stock option compensation fraction of total compensation were to remain constant as the executive ages.